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Welfare Without the Welfare State

Thursday, December 1, 1966

This is from a paper which Professor Brozen of the Graduate School of Business, University of Chicago, delivered before the Mont Pelerin Society, Tokyo, Japan, September 9, 1966.

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society which he has in view. But the study of his own advan­tage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society…. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

ADAM SMITH, The Wealth of Nations

Economics has been characterized as the dismal science. However, the two main questions occupying economists belie that description. Classical economists concerned themselves with the means for en­larging income — with the causes of the wealth of nations — and with the determinants of the dis­tribution of income. Neoclassical economists focus somewhat more narrowly within these larger ques­tions on the causes of waste and how to improve welfare by elimi­nating waste.

The classical group did not neg­lect the analysis of causes of waste. They dealt with the welfare consequences of state intervention in international trade — the effects of the imposition of tariffs and of trade and navigation acts. They also pointed to the welfare conse­quences of state intervention in the internal economy — interven­tions such as the creation, by royal grant, of monopolies of soap, play­ing cards, salt, and so forth.

The fact that classical and neo­classical economists thought prog­ress possible — that the lot of man could be improved by enlarg­ing resources and by better utiliz­ing the available resources—makes economics an optimistic science. It was the discussion of Malthusian demographic propositions that led to the characterization of econom­ics as a dismal science.

Malthus, and footnotes to Mal­thus added by Marx, the Webbs, the Fabian socialists, and others such as the proponents of the iron law of wages, created the notion of a permanently depressed class doomed to a subsistence level of life. This was a major excuse for proposals for intervention by the state, although it is hard to see how believers in Malthus and in the iron law of wages could con­clude that redistribution of income would cure poverty. All it could do, if the logic of this view is ac­cepted, would be to doom everyone to poverty instead of the laboring classes alone.

Many modern interventionists, such as the members of the Ad Hoc Committee on the Triple Rev­olution, use the same stale excuse for state action as nineteenth cen­tury Marxists and the Fabian so­cialists, with some change in the supposed reasons for expecting a permanently depressed class grow­ing ever larger.1 The modern ver­sion propounded by these dismal scientists argues that automation is dispensing with the need for labor services and that cybernation is leading to the development of "a permanently depressed class… in the United States."2 Old clichés apparently never die nor do they fade away.

The Goals of the Welfare Statists

Welfare statists are as diverse a group as any other. It is, there­fore, difficult to ascribe to them any creed on which there is mono­lithic agreement. There are some goals, however, which apparently have a high priority with most. The most recent, and the oldest, around which they coalesce is the elimination of poverty and of tem­porary distress by state action. A few poetic souls among the social­ists, such as George Bernard Shaw, have suggested that poverty be eliminated by shooting the poor.

Although the elimination of poverty is a goal which the wel­fare statists have appropriated as if it were their own discovery, economists of a liberal persuasion (in the European sense of liberal) have long held this same goal.³ It is the means for accomplishment on which liberals and intervention­ists (welfare statists) differ rather than the goal.

The modern welfare statist, at least in the United States, even appears to subscribe to the state­ment that "the common man or average family has a far greater stake in the size of our aggregate income than in any possible redis­tribution of income." This is cer­tainly the opposite of the refrain of the English welfare statists of the late 1940′s who thought that the economic problem was not one of increasing production but only one of redistributing the available output. Growthmanship and the urge to direct the economy in paths which maximize the rate of economic growth have become com­mon to the welfare statists. Eco­nomic growth is now an important goal among the welfare statists as well as the elimination of poverty and the achievement of greater equality in the distribution of in­come.

Consuming What We Should

In addition to these goals, there is a very large group among the welfare statists who are also in­terested in seeing to it that we consume the right things. Cars with tail fins, heroin and other narcotics, useless (however the term may be defined) drugs, the sight of ugly (however that term may be defined) or ramshackle buildings and junkyards, books which are improperly advertised, inartistic television programs, and abstract paintings are proscribed. Orchestral and dance perform­ances, provided they are of the proper variety, representational paintings, statuary, visits to state-owned parks (unless they are out­side the national boundaries), and the consumption of educational and medical services are promoted. The most influential groups pro­moting the interventionist or welfare state are not those who be­lieve in the welfare state because of any ideals relating to the im­provement of the lot of the poor and the distressed or the promo­tion of the brotherhood of man by compressing the differences among them into a semblance of economic equality. They are a disparate set of groups, each interested in en­hancing its own material status, even at great expense to others provided some drop of material gain emerges for it. Taxicab owners, in the name of improving the condition of taxicab drivers, persuade city councils to limit en­try into the taxicab business. Northern textile mill operators and unions, in the name of helping the poverty-stricken employee and with the aid of the welfare stat­ists, bludgeon Congress into pass­ing minimum wage legislation. Real estate operators, contractors, and building trade unions, in their passion to improve the housing and condition of slum dwellers, eagerly promote governmental ap­propriations for urban renewal. Railroad, trucking, and barge line interests, in the name of providing essential transportation services for small businessmen and farmers on a nondiscriminatory basis, sup­port transportation regulation with indefatigable zeal. The special in­terests, from sheep rancher to stockbroker, find the interventionists to be handy, if unwitting, allies. These allies serve as front men and as a smoke screen to ob­scure their intent and the damage they do to the general welfare when they use the state to serve their special welfares.

More Harm than Help in Welfare State Programs

This melange of specific meas­ures is certainly recognizable to most economists as damaging to the general welfare. A minority recognizes that these measures cause some of the poverty which concerns us. We need not tarry long over the fact that these meas­ures damage the general welfare, on net balance, although they may enhance a host of welfares. Of course, when I say that the general welfare is damaged, I include in the general welfare the welfare of the benefited groups. The damage to others is greater than the gain to those benefited.

I should add that abolition of a large group of these measures simultaneously could produce a net benefit for any one of the groups which would lose from the abolition of the specific measure directed to its welfare and benefit. The producer of price supported cheese and milk could find himself selling in an even higher priced market or producing at a lower cost if transportation regulation, minimum wage laws, union-sup­porting legislation, tariffs, and so on were abolished along with agri­cultural price support programs.

Some of these measures, which may have produced short-run benefits in the past, may now dam­age the very people they once bene­fited. Textile workers may have had a rise in wage rates relative to what they otherwise would have been paid after the passage of tariff legislation imposing import duties on textiles. However, wage rates earned by textile workers in the United States today are prob­ably lower than they would be without tariffs. Our export indus­tries today are high-wage indus­tries. To the extent that tariffs limit the dollar earnings of those who could otherwise sell more to the United States, they have lim­ited the demand for U.S. exports and the number of jobs at high rates in the export industries. As a result, U.S. export industries are not recruiting textile workers as aggressively as they would with­out the tariffs, textile workers are not shifting as rapidly as they otherwise would to high-wage jobs in export industries, and their wage in textile work is lower than it would be if export industries were bidding more aggressively for their services.

Although we know that mini­mum wage laws hurt the poor by costing them jobs, that agricul­tural price support programs hurt the poor by raising the prices of their food, that transportation regulation hurts the poor by pre­venting industry from moving to disadvantaged regions where the poor live and increases the cost to the poor of migrating to the regions where better paying jobs can be found, that union support­ing legislation hurts the poor by permitting union power to grow to the point where it can be and is used to restrict the entrance of the poor into higher paying occu­pations, that urban renewal ap­propriations hurt the poor by forc­ing the slum dweller out of low-priced housing into higher priced housing, that regulation of the field price of natural gas increases its price and the price paid by the poor for cooking and heating fuel, that usury laws make it more dif­ficult and expensive for the poor to obtain loans, that subsidizing subway fares benefits property owners in mid-town locations rather than the poor who ride the subways,’ where is the welfare statist who opposes these meas­ures and calls for their abolition?

Instead, the welfare statist simply argues more urgently for more poverty programs, more job-train­ing facilities and support, more generous relief programs, still more subsidies for the items he re­gards as important in the budgets of the poor, more grants to educa­tional institutions and more edu­cational establishments operated by the state, longer periods of compulsory school attendance, and the like. The welfare statist could do much for the poor by working to abolish the measures that add up to a state-of-many-welfares and lowered general welfare.

Here, then, is an important dif­ference in the means of the inter­ventionist and the means sug­gested by liberals for assisting the poor to greater affluence. The in­terventionist proposes specific as­sistance measures for the poor. These essentially aim at trying to offset the damage he has unknow­ingly created with his melange of state measures benefiting special interests. Job-training programs, unemployment insurance, old-age assistance, aid to dependent chil­dren, public aid, the Job Corps, volunteers in service to America, area redevelopment programs, to name a few items from the menu of the welfare state in America, serve primarily to partially offset, for some groups, the damage done by earlier interventionist meas­ures.5 The liberal, on the other hand, proposes to release each man’s drive for self-improvement and each man’s willingness to con­tribute to the welfare of others when his activity also contributes to his own welfare. He proposes to remove the barriers to self-improvement and to private con­tributions to welfare. He proposes the provision of opportunity for self-development and the develop­ment of independence where the welfare statist proposes measures which not only are less efficient but which contribute to an increase in dependency and a decline in the rate of growth and the level of national income.

Welfare Generation by Non-State Activity

Activities which improve the lot of the poor undertaken for self-interested reasons apparently are suspect to the welfare statists. The motive is wrong; therefore, the results are unacceptable. Those furnishing cheaper provisions for the poor or job training and better paying jobs because they hope to profit by doing so are not accept­able. Presumably, a Peace Corps volunteer who teaches an illiterate Brazilian to read without hope of profit is doing more for the illiter­ate Brazilian than General Elec­tric do Brasil when it hires teach­ers to teach the illiterate members of its work force to read in the hope that it can reduce its super­visory costs and increase its profits. The end result is the same. Illiterate Brazilians learn to read. But the motive is different. Some­how that means that the Peace Corps volunteer has contributed to the welfare of poor Brazilians and G.E. has not. The Peace Corps volunteer was not motivated by self-interest (except to the extent that he desires travel and adven­ture and instant status at mini­mum cost) while G.E. was moti­vated by a lust for profit.

Many of the proposals of the welfare statist simply result in the substitution of state activity for private activity without any net gain in the welfare generated. The welfare statist proposes job-train­ing programs for the unskilled poor with the purest of motives -­to uplift the downtrodden. He pro­poses the expenditure of tax funds to train taxi drivers, which re­duces the outlay by taxi companies to train drivers. He proposes the expenditure of tax funds to train filling-station attendants, which reduces the outlay by refiners to train attendants.

Does the expenditure of taxmonies do more for the newly trained drivers and attendants than that of private funds? The answer to this question must be­come embarrassing to the welfare statists when tax funds are de­voted to training ship stewards who then find no jobs available even for many with long experi­ence. At least, company funds are used for such training only if some use will be made of the in­vestment in job training. But the welfare statist seems to think no contribution to welfare occurs when profit motivated expendi­tures are made, while a great con­tribution occurs if the funds are taken by the state and then ex­pended under state aegis.6 Yet the net improvement in welfare even if we consider only the welfare of the poor is, in many cases, greater if the funds are left in private hands.

No Faith in the DirectionsOffered by the Open Market

The welfare statist apparently wants to produce economic growth, increased equality, and improve­ment of the lot of the poor by di­rect intervention and governmental direction rather than by using or permitting impersonal social forces to produce these same re­sults. Some of them obviously do not understand how normal mar­ket forces and normal evolution can produce the desired results. Others, particularly the political types, may understand this but either wish to use direct measures in order to obtain credit for the results or in order to build their power.

If economic growth is desirable, and that is the excuse for much interventionist activity and for many discriminatory or non-neu­tral tax laws, it is likely that as much or more will be generated (by the private economy) with fewer interventions and a more neutral tax structure than is the case in most countries which have inaugurated interventions and dis­torted their tax structure for the avowed purpose of stimulating growth.? Usually, these measures have a double purpose of achieving both more growth and more equal­ity. Yet, they frequently negate both purposes.

The passion for equality, which appears to be the basis for impos­ing both property taxes and cor­porate earnings taxes on property income in addition to the personal income tax while only the personal income tax is imposed on wage in­come, would be better served by a neutral tax structure than the present non-neutral structure in use in most countries. With less attempt to use state power to com­press the inequality in the distri­bution of income, inequality would diminish more rapidly. Low wage rates would rise more rapidly with a higher rate of saving and capi­tal formation, and inequality would diminish with the rise in income of wage earners. Instead, the welfare statists are attempting to diminish inequality by slicing down the top with some redistri­bution to the bottom. Inequality has been diminished by the tax and transfer structure, but by less than it would be diminished in a short time by the evolution which would occur under a neutral tax structure with less intervention by direct means.

The Nonadditions to Welfare Produced by the Welfare State

Inasmuch as a very large por­tion of welfare expenditures in the United States is for the benefit of those who are taxed to provide the funds, the tax structure is impos­ing a very large burden with very little redistribution. Elimination of state use of funds to provide people with what they could and in most instances would buy for themselves if their funds were not taxed away would contribute to more rapid economic growth, a more rapid rise in the incomes of those who receive less than $3,000 per year — the official poverty line for families of four in the United States — and an increase in the equality of income distribution through the forces of normal eco­nomic progress in free markets.

As Professor Lampman has re­marked, with $100 billion of trans­ferred income in the United States, $81 billion of which is financed by taxes, "how can we explain the fact that there is any poverty left in the United States?"8 The expla­nation lies in the fact that a major part of the transferred income does not go to the poor. It goes to people in the form of services which they are quite capable of buying for themselves and money grants which have been described as "poverty programs for the well-to-do." The agricultural program (a poverty program for rich farm­ers) is an example of the latter. Free services provided by publicly maintained educational institu­tions are an example of the form­er. In 1964, of the $28 billion of tax money spent on publicly oper­ated educational institutions, only 18 per cent of the services were provided for the 28 per cent of the population who are classed as poor on a pre-transfer income basis (only 18 per cent of the pop­ulation were classed as poor on a post-transfer income basis). In my own state, estimates have been made which indicate that the pub­licly operated universities take more from the poor in taxes than they provide to them in services. Charging for the services of these universities and removing their tax support would increase the in­comes of the poorest part of the population relative to the incomes of those who are relatively well off.

Relief for the Affluent

A number of other government enterprises presumably devoted to the task of redistributing income by providing subsidized or free services for the poor perform in much the same way as the pub­licly operated educational institu­tions. They provide a very large portion of their services to the well-to-do who are capable of pur­chasing these services with their own means. Electricity and tele­phone service for well-to-do farm­ers and suburbanites are subsidized by the Rural Electrification Administration. Electricity for poverty-stricken corporations such as the Aluminum Corporation of America and the Du Pont Com­pany is subsidized by the tax free status of the Tennessee Valley Au­thority (27 per cent of the price of electricity goes to pay the taxes imposed on privately operated utilities). Irrigation water for well-to-do farmers is subsidized by the Bureau of Reclamation and by the city poor who are overcharged for water to pay some of the losses on water furnished for agri­cultural purposes. Subsidized loans to home owners, to farmers, to small businesses, to maritime operators, to railroads, and so forth are subsidies for the well-to-do. We are even proposing to sub­sidize middle income apartment renters— where a middle income is defined as $8,000 to $11,000 per year.

A very large portion of the wel­fare provided by the welfare state simply provides a substitute for what those who receive the serv­ices were buying for themselves or would buy in their present cir­cumstances. To this extent, the welfare state has not increased the welfare available in our soci­ety. To the extent that the state-provided substitutes are inferior to what people were providing or would provide for themselves, there is a welfare loss. Inasmuch as state-provided services tend to be uniform and are not adapted to the desires of those receiving the services, a very large portion of these services are inferior to what people would purchase in a free market in which firms must com­pete for customers.

The Welfare Losses Generated by the Welfare State

As indicated above, much of the officially defined poverty found in the United States is a consequence of attempts to increase by state intervention the share of the na­tional income pie received by vari­ous groups. These interventions have taken such forms as control­ling relative prices to make them different from what would be found in a free market or by changing relative private costs by such means as differential tax rates. To produce some of the hoped-for changes, the state has limited entry in some markets or delegated the power to private groups to limit entry. It has pro­vided goods below cost, and in­creased the prices of other goods to above their social cost.

The deleterious effects on the size of the national pie of inter­ventions which change relative prices and costs has led some lib­eral economists to suggest that it is preferable to increase the size of the slice received by various groups by direct income transfers. This, presumably, would have a less harmful effect on the size of the national income pie available for slicing. Such transfers are pre­sumed to avoid shrinking the pie which has the result of shrinking the size of the slice received even when it turns out to be a bigger share of the shrunken pie.

What is too often forgotten is that even income transfers may shrink the pie by as much or more than the amount of income trans­ferred. Income transfers condi­tioned on the recipient falling be­low some designated income level also effect relative prices — the price of leisure relative to other goods. There is evidence that many of the poor in the United States are poor in pre-transfer income because they are paid to be poor. As Pigou once remarked, "If… it is understood that everybody’s income will… be brought up by State aid to, say £3 a week, it will, generally and roughly, be to the interest of everybody capable of earning by work any sum less than £3 a week to be idle and earn nothing. This must damage the national dividend."9

When It Pays Not to Work

A study of the effect of the level of public aid payments on the number of persons requesting and receiving such payments in the United States in the 1950′s indicates that a very substantial pro­portion of those on the welfare rolls are "not on assistance due to zero wage alternatives." The high­er the level of public aid to each recipient, the larger the number of people who choose not to work. The proportion on public aid rolls in the 1950′s who were "not on as­sistance due to zero wage alterna­tives" averaged nearly 50 per cent over the decade. The level of as­sistance payments may have ac­counted for as much as 87 per cent of those on public welfare rolls in one year.¹º

A study of experience with un­employment compensation in six states reached a similar conclu­sion. The higher the level of un­employment compensation relative to take-home pay from his last job, the longer an unemployed worker remained unemployed.

Still another example of the de­cline in self-support and national income resulting from income transfers is provided by a study of the economics of vocational re­habilitation. Vocational rehabilita­tion investment returns $10 to $17 in present value of enhanced fu­ture earnings for every one dollar invested. However, the net private return to the disabled is very much less. As a consequence, most of the disabled choose not to in­vest in rehabilitation. Earning an income would mean the sacrifice of their social security disability payments, their public assistance receipts, or their workmen’s com­pensation."

Here, then, is a second element in the answer to Lampman’s query, "How can we explain the fact that there is any poverty left in the United States?" despite $100 billion of transferred income. The more income that is trans­ferred to the poor, the larger the number of people who will choose to be poor. A program to alleviate poverty such as direct grants to the poor creates more poverty to be alleviated. A reduction in the level of welfare payments will also reduce the amount of poverty.

Conclusion

Our sovereigns in the United States have been so intent on ex­tending state benefits to each peti­tioner and have paid so little heed to costs, to the nonrevenue yield­ing burden of taxation, and to the consequences for general welfare that the welfare state as it is op­erating is reducing the general welfare. General welfare has been reduced by an amount such that the larger slice obtained by some is of such a shrunken pie that most of the successful petitioners are worse off. In addition, the goals of the avowed welfare stat­ists have been poorly served by our welfare state. Admittedly, there has been a net redistribution of current income in favor of the poor as a result of public assist­ance payments and the transfers within the social security system. However, even these measures have had undesirable conse­quences. They have produced a state of dependency which is being handed on within families from generation to generation. They have forced early retirement for many who would prefer to go on working, but choose not to do so since benefits would be sacrificed under the rules enforced. They have created the poor, measured by pre-transfer income, since it pays to be poor.

The small measure of redistrib­utive success accomplished by our welfare state has been accompa­nied by great inequities, by a fail­ure to stimulate growth (a debat­able goal for a state, however ac­ceptable as a matter of individual choice), and by a great waste of resources in attempting to force the consumption of items judged superior by the welfare statists. Even the recent medicare act seems to be resulting largely in the substitution of payments by the state for medical services for those over 65 which were formerly paid for privately. The redistribu­tive effect has been small while the illusion of state benefit has been large.

The welfare statists have suc­ceeded in injecting the state into a multitude of activities ranging from city-operated trash collection services to patronage of the per­forming arts, but it appears that at best they have substituted pub­lic activity for private.¹² More likely, they have diminished the speed of movement toward the goals they profess to serve. At the very time when more symphonic performances under private sup­port were occurring than ever be­fore, more students were in college than ever before, more people over 65 were receiving medical serv­ices and were insured against med­ical disaster than ever before, more effort was being expended on gardening, landscaping, and other forms of beautification than ever before, the welfare statist found that not enough was being done and forced an enlargement of the state role in such activities. At the very time when inequality has lessened and poverty has moved closest to disappearance, the wel­fare statists suppress the means which brought about this happy state of affairs and inject the state, the device whose iniquitous effect on the wealth of nations was discovered two centuries ago and with whose declining role in eco­nomic affairs was associated the greatest flowering of affluence for the masses.

It is the free market which so­cialized the genius of Edison and Steinmetz and a multitude of oth­ers. The state has typically been a device for producing affluence for a few at the expense of many. The market has produced affluence for many with little cost even to a few. The state has not changed its ways since Roman days of bread and circuses for the masses, even though it now pretends to provide education and medicine as well as free milk and performing arts. It still is the source of monopoly privilege and power for the few behind its facade of providing welfare for the many — welfare which would be more abundant if politicians would not expropriate the means they use to provide the illusion that they care about their constituents.

—FOOTNOTES—

1 "… over 20 per cent of the American population is exiled from the abundant economy and this percentage will grow… in coming years." R. Theobald, Free Men and Free Markets (New York, C. N. Potter, 1963), p. 20.

3 ".. the chief motive of their I the Physiocratsl study was.. to diminish the suffering and degradation caused by extreme poverty. They thus gave to eco­nomics its modern aim…" Alfred Mar­shall, Principles of Economics (London: Macmillan and Co., Ltd., 1930, 8th ed.), p. 757.

4 A discussion of the damage done by these various measures and references to several studies of their net effect can be found in Y. Brozen, "The Revival of Traditional Liberalism," The New Indi­vidualist Review, Spring 1965 (Vol. 3, No. 4).

5 Estelle James points out that "a major rationale for future government activity is past government activity." Re­view of The Economics of Vocational Re­habilitation, American Economic Review, June 1966 (Vol. LVI, No. 3), pp. 640-42.

6 The Department of Interior, in its suit attempting to block the construction of a dam by the Virginia Electric Power Company for which it had received a license from the Federal Power Com­mission, argued it would be better if the dam were never built than to have it erected by a private group.

¹2 One of the results of the poverty program in the U.S. is that many private philanthropic organizations have been stripped of skilled personnel who have been hired away to administer public programs.